By The European Central Bank (ECB) issued a new report on Aug. 7, 2019, revealing their plans to use more on-chain data to monitor the crypto markets better.
The report was titled “Understanding the crypto-asset phenomenon, its risks, and measurement issues.” It focused mainly on categorizing and analyzing the crypto-asset phenomenon to monitor potential implications for monetary policy and the risks crypto-assets may pose to the smooth running of the financial system.
Analyzing the Crypto-asset Phenomenon
According to the report, the ECB has already built a system that uses “high-quality” aggregated data, accessible online, in its efforts to assess the crypto-asset phenomenon. They use the system to categorize and monitor how the financial technology might affect monetary policy and potential risks.
It further argues that the risks and “spillover effects” of digital assets to the fiat economy depend on the extent that the two domains are interconnected. Thus, it advises the ECB to prolong and refine its qualitative and quantitative analysis of the emerging crypto class.
The analysis proposed should help provide hard transaction data covering both on and off-chain transactions. This will result in a fuller understanding of the crypto-asset market as opposed to what is currently available.
The currently available data has limits to its value. It leaves gaps and challenges such as the exposure of financial institutions to crypto-assets and payment facilities that utilize layered protocols. Furthermore, the decentralized and poorly regulated nature of crypto asset-related activities complicates efforts to organize systematic data collection efforts.
The ECB report addresses the importance of collecting accurate data and says that retrieving public data on segments of the crypto-asset market, that remains off the radar of regulatory authorities is a challenge. The report goes on to call for increased links between crypto platforms and regulated financial authorities as a solution to allow more regulation in the crypto space.
Calling for More Cryptocurrency Regulation
The EU banking authority promised to continue working on indicators and data by dealing with the complexity and growing challenges faced in analyzing on-chain and layered protocol transactions. Also, to seek new data sources for info on links between crypto-assets and regulated firms.
The report went on to highlight how the financial system and the economy may be exposed to crypto-asset risks. This is because the digital assets can be accessed by anybody with an internet connection, even without having an account with a crypto-asset service provider.
Additionally, Initial coin offerings (ICO), are giving investors a mostly unregulated way to raise capital for their projects by generating new crypto-assets in a way similar to initial public offerings. An excellent example of this was the highly publicized Tezos ICO that raised $232 million in 2017.
The report acknowledges that such unique characteristics of cryptocurrency may have significant implications for measuring nations’ GDP. It says that statistical classification for crypto-assets remains a complex task, given that their very nature isn’t to represent a financial claim on, or a liability of, any recognizable entity. This complicates any attempts at comprehensive analysis and regulation. It has been proven by recent initiatives to refine crypto data collection and analysis undertaken by bodies such as the Irving Fisher Committee on Central Banking Statistics.
In attempting to regulate the crypto space, public authorities and central banks must contend with rather illiquid crypto trading platforms that may be affected by wash trading.
In essence, exchanges can employ a whole range of tactics to falsify their volume. This includes buying twitter likes, filling fake order paperwork, and attempting to disguise their wash trading using different bot settings to avoid affecting the price. An excellent example of wash trading is the recent damning report on Bitcoin price manipulation by Bitwise Asset Management. The report released in mid-march of 2019 alleged that close to 95 % of the recorded BTC trading volume was due to wash trading by bots.
There has also been similar research from trading analytics platforms such as The Tie, which warned in Mar. 19, 2019 that 87% of cryptocurrency exchanges’ reported trade volumes may be inaccurate.
Furthermore, the ECB report takes into account the lack of consistency in the methodology and conventions used by regulated exchanges and commercial data providers. This is especially evident with custodian wallet providers that allow the storage of private keys to be used to sign crypto-asset transactions.
This scenario recently sparked a debate after a Canadian crypto investor died without disclosing the private keys for wallets holding fortunes for hundreds of investors.
Closing Data Gaps
The report concluded with the acknowledgement of the major data gap that exists with regards to the inter-linkage of crypto and the real financial sectors. These included the amount of banks’ direct holdings of crypto-assets and data on current lending for purposes of purchasing crypto assets.
Finally, an analysis of the data on transactions carried out using layered protocols is also required to capture the real scope of crypto-asset use in distributed ledger technology (DLT) networks.
In its conclusion, the ECB vowed to continue to analyze both “on-chain and layered protocol transactions” and to concentrate on coordinating and increasing metadata for off-chain transactions, and developing improved practices for crypto-asset indicators.
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